Comparing Private Student Loans and Federal Student Loans

When federal loans are not enough, private student loans can help you meet higher education expenses that are not covered by your own resources, grants and other aid, or federal student loans.

When You Need a Private Loan

Determining the level of help you need in paying for college begins with the Free Application for Federal Student Aid, or FAFSA, online system. Inputting personal and financial information will yield and Expected Family Contribution, that is the amount you and your parents will be expected to pay toward your own higher education. For costs above that amount, the first stop is applying for federal student loans. If these three funding sources leave expenses still to pay, this is where federal private student loans come in.

Compared to Federal Student Loans

Federal student loans are offered through the Federal Family Education Loan, or FFEL, program, the Perkins Loan program and through the government's Direct Loan program.

Federal Family Education Loans include:

  • Stafford Loans - These loans are subsidized or unsubsidized, which determines when you begin payments once you leave school. They feature relaxed qualification requirements, such as no credit check. The interest rate typically is below market, and repayment doesn't begin until the end of a six-month grace period after you graduate or are no longer at least a half-time student at a qualifying institution.
  • PLUS - The Parent Loan for Undergraduate Students program, which also is available for graduate and vocational students, is available to parents of qualifying, dependent children. There is a credit check for these loans, and a cosigner is allowed.
  • Consolidation  Loans - This program allows you to bundle other federal loans into one loan after you are out of school, often resulting in a lower payment. They do not require a credit check.

The Perkins Loan program features a low interest rate and is targeted at students with a demonstrated exceptional financial need.

The Direct Loan program is also a low-interest loan program where parents or students borrow directly from the Department of Education and which includes subsidized, unsubsidized, PLUS and consolidation loans. A credit check is required for PLUS loans.

Considerations for Private Student Loans

Federal private student loans through Sallie Mae may be applied for after securing all the free aid and federal student loans you can. Federal private student loans require that you be a creditworthy borrower and reward good credit standing with lower interest rates. You can also use a cosigner to improve your credit standing on the application.

Repayment of federal student private loans is not deferred until after you are out of school, but there is an interest-only option while in school. There also can be disbursement fees associated with these loans.

Private-Sector Lenders

Another lending source to compare to federal private student loans are private-sector loans. These loans will be at market rate, and you must qualify for them as with any other loan. While you must use your own resources, free aid and federal student loans before applying for federal private student loans, you should similarly exhaust all options for federal private student loans before using a private-sector lender. You can save money and have more repayment options if you do.

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